What Is A Subprime Loan Lender?

This is a lender who lends money to borrowers who do not qualify for loans from mainstream lenders. Often these lenders are independent, and yet more and more are affiliate with mainstream lenders operating under different names.

The only clear giveaway are their prices, which are higher than those quoted by mainstream lenders. And some of these lenders offer both prime and subprime loans. They will try to qualify you for prime and only if that fails will they drop you to subprime.

Lenders who are strictly subprime might refer a prime borrower to an affiliated prime lender, but their financial interest dictates otherwise. It is definitely to your advantage if you quality to go with a prime lender no matter what a subprime lender might tell you.

Subprime lenders base the rates higher the lower your credit scores are and the smaller the down payment is. However, the entire structure of rates and fees is higher to cover the risk of subprime lending.

Who Would Be Considered For A Subprime Loan?

The failure to qualify for prime financing is due primarily to low credit scores. A very low score will disqualify. A middle score might or might not, depending on the down payment, the ratio of total expense (including debt payments) plus income and assets.

Also, the purpose of the loan and the property type could make the difference. For example, if the borrower is weak in some factors he could make it if he was purchasing a one-bedroom home as a primary residence. But if he were purchasing a four-bedroom home he would not qualify.

Another type of borrower for this type of loan is someone with poor credit scores. They apply for an adjustable rate mortgage on which the rate is fixed for two years, and then rises sharply. The trick is to refinance before the two-year mark.

The major threat to such a plan is a prepayment penalty that runs past two years, and a lender fails to report their payment history to the credit agencies. Borrowers should be on their guard against both.

The Major Problem Of Prime Borrowers Getting Subprime Loans

The development of the sub-prime market has made mortgages and home ownership available to a segment of the population that otherwise would have been shut out of the market. That’s the good news.

The bad news is that some borrowers who are eligible for loans from the prime lenders can end up in the subprime market and pay subprime prices.

Subprime lenders market aggressively to homeowners who already have mortgages. A major pitch is the cash the borrowers can take out of their properties through a cash-out refinance. Also, lower payments are possible on interest-only mortgages and the option ARMs that are a gamble, which usually end up in a heavy loss.

A higher percentage of subprime loans than of prime loans go into default. Subprime lending costs are also higher because more applications are rejected and marketing costs are higher.

The best advice is to keep your credit score high, save for a deceit down payment, have little or no bills and go with a responsible prime or mainstream lender with a good reputation.

When applying for mortgages, there are so many new and strange terms that it is easy to get lost in the vocabulary. It is always good to do a little research on your own of terms that seem unfamiliar or confusing. But, also remember that you can always ask your lender or loan officer to define these terms. Some terms that may seem unusual and strange to you are front end and back end ratios.

Front end ratios are ratios that show what portion of your income will be made in monthly mortgage payments. They include the principal, interest, taxes and insurance which is sometimes referred to as the PITI. This can be calculated by taking your annual income and dividing it by twelve (for the twelve months of the year). You then take your monthly house payments and divide it by your monthly income. This will give you a percentage.

This percentage will be your front end mortgage. For example, if your annual income is $60,000 we would divide that by twelve to get your monthly income of $5000. If we know that your front end ratio is 31% we can then multiply the two numbers to find that your monthly mortgage payments would be $1550. Most lenders would like this ratio to be 28% or lower but it does depend on the lender.

Back end ratios deal with your total debt payments every month.It is also known as your debt-to-income ratio. This includes mortgage payments, credit card debt, car payments, child support and other loan payments. The back end ratio can also be determined very easily. After adding up your entire monthly debt payments you then divide the sum by your monthly income. That number is then multiplied by 100 to give you a percentage or your back end ratio. Now let’s plug in some real numbers to see how it works.

If we use your monthly income of $5000 and say that your monthly debt payments is $2000 then it is simple to find your back end ratio. We would divide $2000 by $5000 and then multiply the 0.40 by 100 giving us 41%. Now keep in mind that again most lenders do not want this ration to exceed 36% but it does depend on the lender. It mainly depends on what area of the country you live and what the cost of living is for that area.

The reason that your lenders will be very interested in the front end and back end ratios is because they want to make sure that you do not default the loan. By not exceeding the 28% or 36%, you should have no worries and be able to make your payments with ease. If you have any concerns about having a front end or back end ratio being too high, talk to your loan officer about it.

It may just need to be put off for a few months until that ratio can be lowered a bit by paying off a credit card or eliminate other forms of debt. Just make sure you have an open attitude when it comes to determining these ratios.